Conventional Balloon Mortgages
Balloon mortgages are fixed rate hybrid loans. (You may also see the terms: rollover loan, extendable loan, or bullet loan to describe these mortgages).

How Balloon Mortgages Work

The most common balloons mortgages have a fixed rate for five or seven years with a thirty-year amortization. At the end of 5 or 7 years the mortgage has several options:

1. The loan must be paid-off:

  • by refinancing the loan or
  • by selling the home.
2. The loan term may be extended. When the loan is extended, the interest rate is adjusted according to the original mortgage note provisions.

The note provisions normally call for the new interest rate to be calculated using the current net yield for 30-year mortgages plus a margin of .375 to .875%. This calculation usually results in a new interest rate of about .25% to .50% higher than what new 30-year loans are available in the market place.

There are certain conditions that must be met to take extend the loan. Typically, the conditions include:
  1. the home is still your primary residence,
  2. you have a good payment history and your payment is current, and
  3. there is not a second mortgage or equity line on the property.

Another loan type to review are the adjustable rate mortgages (ARMs) with initial fixed rate periods. There are a wide variety of these hybrid ARMs available offering fixed interest rate periods of 3 to 10 years.

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